One of the most frequent questions we get asked is what happens to the actual or potential liability associated with the advice [I] provided prior to the sale? It follows that it is also one of the more hotly debated topics during the contract process too.
In the past 12-18 months we have seen a shift towards buyers being prepared to acquire the share capital of target businesses. This helps sellers with their capital gains tax position and also means there is no de-authorisation or closure process to be undertaken post-sale. However, as they are inheriting the liabilities for past advice, most buyers will seek protection from potential liabilities arising from advice before the sale. Below we have explored the two most common approaches that we’ve seen buyers taking.
Indemnities. Indemnities are, broadly speaking, contractual protections that allow the buyer to recover any costs or liabilities it incurs in relation to a specified matter (e.g. advice given before completion). They are buyer-friendly and, unless qualified, give a buyer a wide ranging right to recover any associated liabilities on a £ for £ basis. They are also often outside certain standard limits on a sellers liability too so need to be treated with caution.
Whilst it’s not unusual to see indemnity protection used across deals in the sector, it is rare for indemnities to be given without qualification. This includes qualifications that the sellers have a right to participate or conduct any client complaint which might give rise to a claim from a buyer under an indemnity, or for professional indemnity insurance to be used (often subject to the seller paying the excess) and for the liability to be capped to a maximum level. In our experience, it would be unusual in the IFA sector for a buyer to have a free-ranging right to rely upon an indemnity and to manage the claims process, so sellers should look to balance their exposure under an indemnity.
Insurance. All regulated businesses will have professional indemnity insurance in place whilst they are actively trading, and we’re seeing a trend in sellers being obliged to obtain cover in respect of historic advice post-completion, notwithstanding that they may have sold their shares.
This may take the form of run-off cover or a standard professional indemnity insurance policy if the target will continue trading post-sale. Either way, this is a progressive step in the sector as it moves away from sellers simply reimbursing a buyer in relation to any historic advice liabilities and reflects a more collaborative approach, where the liability is conducted and managed in conjunction with the insurer, ultimately with the aim that neither the buyer nor the seller incurs any substantial costs over and above the excess. Whilst this may still be coupled with a form of indemnity, this is a measure that we would expect to see discussed as part of the sale agreement negotiation as it can greatly reduce the prospect of a claim being made directly against a seller should a client advice claim arise.
Increasingly we are seeing buyers take more creative steps to limit exposure to pre-sale advice liabilities, but the above are still commonplace and we expect that to remain the case for the time being. You should, however, ensure the risk profile and limitations are appropriate in the context of the wider deal terms though and not simply accept that a buyer can pass back potential liabilities to sellers following completion of the sale.